There is a story about a great warrior fitted for battle. Armored head-to-toe, spear and sword in hand. He was feared and dominant in hand-to-hand combat. His opponent, with no armor, carrying a light weapon—with which he was incredibly efficient—approached. The heavily equipped warrior didn’t know what to make of his seemingly ill-equipped opponent. The battle took only seconds: The young ill-equipped opponent, with speed, focus and accuracy, placed a blow between the eyes of the warrior. It is unknown if the blow to the head killed or dazed the warrior; it does not matter, because the ill-equipped opponent ran up to the warrior and with the warrior’s own sword, cut off his head.
The warrior expected, assumed he would engage in one battle, but he got an entirely different one. Do not let the old ways condition you for a battle that is being waged completely differently. Prepare for a battle marked by speed, focus and accuracy. Embrace a new approach.
Throughout the past 300 years, many technologies proved to be transformational for their time when mavericks in managing risks embraced them as opportunities despite a lack of quantifiable data to rely upon. This cycle of an emerging break-through capability being enabled by insurance innovators—which then allowed society to benefit from breakthroughs—has repeated itself several times since the 17th century. The most notable case studies include the opening of the spice shipping lanes, the ability to acquire dwellings and property in the earliest days of the 13 U.S. colonies, and the advent of personally owned motorized vehicles following the dawn of the 20th century.
In today’s era of unprecedented innovation, the pace of new technological capabilities conjures images of a chaotic global storm. Think driverless cars, genome-based protocols, nanotechnology, materials science and the privatization of near-Earth space.
The question to be asked now is: How will today’s insurers respond?
Will insurers tap into their risk-taking DNA and leverage the proliferation of tech as a growth strategy while also serving the historic mission of enabling economies? Will they cede the role of insurance innovation to non-insurance enterprises? Or will it be some combination of insurance and non-insurance entities playing critical roles to support the growth of transformational technologies?
As these scenarios continue to evolve, three incontrovertible realities are impacting the insurance industry:
- Unlike prior historic experiences, the scope and scale of benefits from many breakthrough technologies, combined with the pace of adoption will result in accelerated impacts whether the contemporary incumbent industry opts in or not.
- The ability to discover specific growth opportunities in this era of sea change is open to all incumbents, regardless of their product mix and premium volume. To believe otherwise is to embrace false assumptions about innovation as opposed to actual best practices.
- The window of opportunity in which an insurer can clarify its specific innovation strategy is far from closed. In other words, incumbent insurers have the means, the time, and the resources to gain clarity about what their innovation goals will require.
These three assertions are among the clearest and most consistent findings from our analysis of data from a variety of sources. The data behind the descriptions, observations, questions raised throughout this article and subsequent ones in this series include:
- A survey of insurance company innovation readiness conducted jointly by The Institutes and Insurance Thought Leadership.
- Data from our innovation platform Innovator’s Edge.
- IE Advisory-facilitated innovation workshops.
- Interviews by IE Advisory of 214 company executives totaling more than 1,000 hours. (See Figure 1)
- Insurer innovation engagements covering the full spectrum of product lines and premium volume.
Insurance industry executives, we believe, have an opportunity to claim a leadership role in choosing to engage in technology-based innovation and move the industry forward. Being successful, though, will mean committing to behaviors, processes and expertise that are a departure from the status quo.
Embracing a new approach
Achieving success as an innovator will require insurers to seek new resources and advisers. This is critical to both overcome internal innovation hurdles and to avoid the innovation demons that plague their incumbent partners and advisors.
Incumbent companies operate with an organizational hierarchy, key metrics, and governance structures that are focused almost entirely on addressing issues for which they have already formulated answers. This is especially true in the insurance industry because future strategies are grounded in data from the past. Figure 2 is a simplified illustration of an incumbent organization as a starting framework for consideration. Note the clear role of a CEO, with an executive committee of corporate leaders responsible for separate and distinct portfolios. Think for a moment about the significant resources and cultural norms reinforcing this structure.
Rare are the companies operating on this established and successful model who choose to resource a new venture based on asking questions that begin with “what if…?” unless they already have answers to those questions. Yet insurance innovation requires a willingness to convert the unknown into a known, then convert that known into enterprise growth and scale.
To innovate faster than an early-stage company can scale, an organization must first commit to different strategies. This means turning to a new set of advisers, methods, and tactics other than those used in traditional strategy development.
Companies that have embraced a fresh approach to innovation quickly discover that the road to success can be far less complex and require fewer resources than initial estimates. Changing the culture through innovation is a long road that rarely crosses the starting line. Innovation is learning by doing, leveraging constraints, and success will take care of the culture.
The following illustrations show the two most common innovation models that emerged from the ITL/TI innovation readiness survey as well as the extensive interviews and data collected.
In Model 1, insurers have designated 1-2 people to explore, or lead, some aspect of innovation. These individuals are tasked to research and follow insurtechs, build out some venture capital capability, or relocate to one of a short list of startup incubators. What the research shows with overwhelming consistency is these small teams typically do not have a clear mission, nor a mandate to act. When they report to a C-level executive, capacity for that corporate leader soon becomes the predominant challenge to innovation progress.
In Model 2, insurers are taking the same approach typical of large change efforts for scaled organizations. Multiple innovation capabilities might be launched, often simultaneously, each reporting to a different member of the corporate leadership team. For example, membership in an accelerator or incubator often falls into the portfolio of the Chief Technology Officer, or Chief Information Officer. In this illustration, we see individual units being launched for venture investing, idea generation and management, internal modernization, and a team assigned to incubators. This model intuitively fits with existing cultural norms at many insurers.
Model 2 is also the approach most suggested, or facilitated, by the same external advisors that have a long history serving insurers. However, many of these advisors are also large incumbent organizations, who also operate based on scale, and are also fighting the same innovation challenges as insurers. The results from working with these traditional partners has consistently been described in interviews and intervention engagements as, “we have been at this for 2 (often more) years and have yet to deliver anything truly innovative, or meaningful.” Indeed, as many organizations are now reporting, such a model is virtually guaranteed to generate compromised results, lengthy time horizons to a positive ROI, significant internal conflict and disruption.
Rejecting the status quo
Large organizations too often define a priority in terms of budget size, reporting relationship, and volume of activity. With respect to innovation efforts, this approach translates into the expenditure of significant resources, managed by traditional metrics and reporting relationships.
The ITL/TI survey responses provide more information as to actual practices from within these models that highlight both traditional approaches and expected results. The following graphic takes the survey responses and converts them into an industry-level profile of current innovation beliefs and practices.
Note the significant percentage of companies with an innovation strategy, even though a far smaller percentage see this as a top tier priority. Given that innovation is more about the human side than the technology used, the survey data on workforce involvement is particularly important. Many respondents report they encourage workforce participation in the innovation efforts, while only 30% of the companies reward actual engagement. Finally, only 7% of the companies in the survey are confident they have a select few associates with the skills and experience necessary for success in innovation.
When these responses are connected to the two predominant models from the interviews and engagements, questions of significance emerge. Does the low percentage of companies rewarding workforce engagement reflect the prioritization of innovation? Are innovation reward systems related to a belief many in the workforce lack “innovation skills?” Are companies engaged in innovation hesitant to set up rewards out of a belief the workforce won’t be motivated until more have received training? Note respondents’ significant interest in the upcoming innovation courses being developed by The Institutes.
What does success look like?
Leveraging data from interviews, workshops, webinar feedback, and client company engagements, ITL Advisory Services has provided a profile of a successful insurance innovator, illustrated in the examples below.
Figure 6 highlights the gap between the ITL/TI survey responses against a set of best practices in insurance innovation. Specifically, innovation holds a high priority and a corresponding strategy. Within that innovation strategy is a plan to both encourage workforce engagement, and reward those who participate. Note also how the best practices profile appears to align with the actual responses for existing workforce skills and training. The responses reflect the status of the workforce at this time. The best practices profile reflects a strategy that separates broad workforce training and achieving progress into two simultaneous strategies as opposed to sequential.
Figure 7 illustrates both insurance innovation best practices and a structure capable of driving results.
This model of a small team, chartered by corporate leadership and armed with a clear mandate, mission and set of known best practices, is found within the insurers and reinsurers that are emerging as successful innovators through their results. The key attributes of this structure—leveraging a system aligned with best practices—are organizing principles developed and executed to complete an innovation strategy.
Creating an Innovative Culture
Many organizations identify “creating a more innovative culture” as a goal for their innovation teams and their innovation strategy. Training will move an organization forward, particularly when a workforce has access to the materials on an individual basis via an on-demand delivery platform. However, when organizations decide training must come before action, the resource requirements to achieve that will delay results beyond the current time horizon and prevent desired innovation results from being achieved. Secondly, when teams responsible for driving out new concepts are also charged with the responsibility of training the workforce, the potential for an optimal ROI suffers.
Another important data point on the profile comparison found in Figure 6 addresses insurers’ responses in the ITL/TI survey about the main issues hindering their innovation efforts. The No. 1 challenge for innovation identified by insurance executives was their existing IT infrastructure. In interviews conducted with 53 insurers throughout 2018, IE captured more detailed information reinforcing these responses. The view that IT systems are a hurdle to innovation is predominantly based on a view that the internal IT infrastructure must undergo change requiring all available resources. This reflects misunderstandings about the requirements and tactics of innovation best practices.
Many innovation teams report to IT leadership, particularly in organizations where more than 80% of the innovation focus is on internal capabilities, according to the survey. Insurers achieving returns on their innovation strategies understand a different approach: innovation results can be achieved simultaneously, in parallel to ongoing IT modernization. Identifying an organization’s technology infrastructure as hindering innovation practices is another example of an incumbent culture trumping the innovation priority. The existing IT infrastructure should be viewed as a boundary that drives innovation rather than a roadblock to a top tier priority.
An inescapable truth
The information contained in this and future articles in this series is not intended to be a criticism of the goals and strategies of insurers active in the work of innovation. Rather, the goal is to convert an enormous volume of data into actionable information for the benefit of the industry. The bottom line of our analysis is an inescapable truth that also is captured in a quote from Albert Einstein: “We can’t solve problems by using the same kind of thinking we used when we created them.”
Innovation requires strategies, expertise and processes that are often new and largely run counter to the project strategies typically used by large incumbents. Insurers that fully accept this reality, and act rather than research will be the early adopters that successfully create growth markets.
Chief Innovation Officer
Note: This article—the first in a series on the status of innovation within the insurance industry—focuses on innovation business models and practices. The next installment focuses on early-stage companies, startups, and technology platforms impacting the insurance industry today and in the future, to be followed by an examination of organizations typically classified as outside of the industry who are migrating to within. Read the second article in the series now: Insurance Innovation: Keys to Success